The Federal Reserve Board continues to stress via its wonderful forward guidance strategy that it will keep policy rates extremely low. However, the sustained rally in United States Treasury government yields shows that marketplace confidence in the Fed’s ability to manage (repress) interest rates, especially at the long end of the yield curve, has fallen. Look at the UST 10 year note. Not only did its yield bottom around 1.38 percent on 7/25/12. Not only did yields climb further from lows near 1.55pc (11/16/12 and 12/6/12). They have spiked from 5/1/13’s 1.61pc, touching 2.75pc 7/8/13. And this spike has continued even after the Fed underlined in recent weeks that it would not “taper” its money printing (and other easy money games) too quickly.
The ability of central bank maneuvers to sustain substantial economic growth (and repress government yields and rally the S+P 500 and related equities) probably has weakened.
Rising sovereign debt yields do not always reflect or portend economic growth (recovery) or higher stock marketplace prices. In the current marketplace playing field, rising interest rates in America (and elsewhere) also seem to be “leading” equity marketplace declines. Suppose the US government 10 year rate marches higher from current levels (or even if it stays relatively high versus its summer 2012 and May 2013 bottoms). Suppose the S+P 500 is unable to exceed (or break much above) its May 2013 height and that it declines beneath its late June 2013 low around 1560. The rising yields and falling equities will underscore that the easy money game of the Fed and its central banking allies increasingly strains credibility and thus has diminished substantially in its effectiveness.
In any event, it nevertheless stretches credibility to claim that these recent ECB and BoE statements represent a change of genuine significance. They appear to be clever ploys to boost confidence in the ability of the central banks to help guide and sustain recovery. How likely was (is) it that the ECB or the BoE were (are) going to raise rates anytime soon? Not only is much of Europe in recession, but Europe’s economic crisis (including sovereign and banking debt and related bailout issues) persists. Noteworthy troubles still loom in Greece, Ireland, Portugal, Cyprus, as well as in Spain and arguably in Italy. Moreover, recall the ECB President’s inspiring “whatever it takes” talk about a year ago (7/26/12); people gave substantial credence to that open-ended proclamation.
Consequently, these recent ECB and BoE remarks, like the cheerleading comments by Federal Reserve and Chinese officials after the June 2013 stock marketplace lows, look like a sign of weakness. Are the ECB and BoE losing some of their hold on the distant section of the yield curve? Yes. Again underscore the steady creep higher in longer run government rates in the United States (and many other arenas) despite keeping Federal Funds near the ground.
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The Central Bank Easy Money Game- Taking Credit, Straining Credibility (7-8-13)
US Treasury 10 Year Note Chart (7-8-13)